Reflections on US market developments prepared for IPPSA Annual - - PowerPoint PPT Presentation

London Economics International LLC

Reflections on US market developments

prepared for IPPSA Annual Conference, 2019 Banff, Alberta

Julia Frayer Julia@londoneconomics.com March 12, 2019

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Range of wholesale market situations across the US

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ISO-NE NYISO PJM

ISO/RTO administered energy and centralized capacity market Energy

• nly

market

ERCOT MISO SPP CAISO

Essentially energy only with capacity backstop Wholesale market dominated by vertically integrated utilities

WECC (excl. CASIO) SERC & FRCC

ISO/RTO administered energy market with voluntary (or bilateral) spot capacity market

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Capacity has been 20% to almost 40% of total wholesale market costs in regions with centralized capacity

3

Historical wholesale market cost shares, 2015 to 2017 average

Sources: ISO New England, New York Independent System Operator, Inc., PJM Interconnection LLC, Midcontinent Independent System Operator, California Independent System Operator, Southwest Power Pool, Electric Reliability Council of Texas 74% 23% 3%

ISO-NE

69% 27% 4%

NYCA

60% 37% 3%

NYC

76% 21% 3%

PJM

93% 7% 1%

MISO

37% 14% 1% 48%

CAISO

100%

SPP

100%

ERCOT

Energy Capacity A/S and others Utility revenue requirements for power contracts

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50,000 100,000 150,000 200,000 250,000 PJM NYISO ISO-NE Nameplate capacity (MW) Renewables Oil/ Dual Natural Gas Hydro Uranium Coal

Three US markets use a centralized capacity market with a downward sloping demand curve

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(US$) PJM New York New England Energy prices, implied market heat rate, 2018 APS zone: $36.8/MWh (13.8 MMBtu/MWh) Capital zone: $37.8/MWh (8.4 MMBtu/MWh) Internal Hub: $44.1/MWh (8.9 MMBtu/MWh) Capacity prices, 2018 RTO: $4.22/kW-month NYCA: $1.81/kW-month $8.5/kW-month (existing) All-in prices, 2018 APS zone: $ 42.6 /MWh Capital zone: $40.3/MWh Internal Hub: $55.8/MWh Energy prices, 2020 forwards PJM West: $33.0/MWh Capital zone: $36.8/MWh Mass Hub: $43.3/MWh 2018 Installed Capacity 206,731 MW 44,019 MW 37,534 MW ISO-NE NYISO PJM

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$0 $2 $4 $6 $8 $10 $12 $14 $16 ISO-NE NYISO (NYCA) NYISO (G-J locality) NYISO (NYC) PJM US$/kW-month

Latest capacity market pricing outcomes indicative of a surplus supply situation

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ISO-NE: FCA#13 (February 2019) for 2022-2023 delivery year NYISO: June 2018 spot auction PJM: 2018 BRA for 2021-2022 delivery year

Net CONE and Capacity Clearing Price (“CCP”)

Net CONE Net CONE Net CONE CCP CCP CCP Net CONE CCP Net CONE CCP

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10 20 30 40

• 3,000
• 2,000
• 1,000

1,000 2,000 3,000 4,000 5,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Generation Fleet Aggregate Age (Years) Installed Capacity (MW) New entry - market driven New entry - policy driven Retirement Capacity-weighted average age

New England had a construction boom more than 15 years ago, but in last five years, new generation additions made up

• f policy-driven renewables

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ISO-NE age of generation fleet and new entry/ retirement

Note: Most of the retirements in New England have been coal and nuclear. Coal retirements are a function of both environmental policy and economics.

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10 20 30 40

• 3,000
• 2,000
• 1,000

1,000 2,000 3,000 4,000 5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Generation Fleet Aggregate Age (Years) Installed Capacity (MW) New entry - market driven New entry - policy driven Retirement Capacity-weighted average age

NYISO saw robust gas-fired investment in first decade of

• perations, with more sporadic gas entry recently and a lot of

policy-driven renewables

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NYISO age of generation fleet and new entry/ retirement

Note: We do not distinguish between the various drivers for retirements. Most retirements are based on some element of economics, although some have a political angle as well..

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10 20 30 40

• 15,000
• 10,000
• 5,000

5,000 10,000 15,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Generation Fleet Aggregate Age (Years) Installed Capacity (MW) New entry - market driven New entry - policy driven Retirement Capacity-weighted average age

PJM has experienced waves of market-driven investment: large market, more opportunities for new additions

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PJM age of generation fleet and new entry/ retirement

Note: Most of retirements are coal-fired, and a result of both environmental policy and market economics

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Capacity market rules have evolved at 3 to 5 year intervals on average

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= capacity market reform = pending proposal

Timeline of capacity market reform in selected ISOs

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ISO-NE 1 2 3 4, 5 6 7 NYISO 1 2 3 4 PJM 1 2 3 4 CAISO 1 2 3

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Capacity market rules have evolved at 3 to 5 year intervals on average (continued)

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Legend

1: spot ICAP market 2: addition of sloped demand curve 3: addition of Buyer side mitigation (MOPR) 4: addition

• f new zone:

G-J Locality 1: Spot ICAP market 2: move to RPM, first Base Residual Auction held 3: introduction

• f Capacity

Performance scheme 4: awaiting FERC decision

• n RCO

proposal (MOPR) 1: System and Local Resource Adequacy instituted by state regulator (spot capacity, bilateral) 2: CAISO wins FERC approval for Flexible RA 3: proposal to move to forward capacity procurement 1: spot ICAP market 2: FCM adopted (with transition period) 3: first Forward Capacity Auction 4: addition of sloped demand curve 6: move to MRI demand curve 7: CASPR implemented (to accommodate “sponsored resources”) 5: introduction of Performance Incentive scheme

New England New York PJM CAISO

= capacity market reform = pending proposal

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Power markets were designed in an era of positive load growth… but that is no longer true for the future

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Sources: ISO-NE CELT, NYISO Gold Book, PJM Load Forecast

10-year average expected outlook for peak load in each vintage of forecast year

• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 10-year average expected outlook for peak load (%) Year when forecast published ISO-NE NYISO PJM

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Policy encroaching on market

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EVENTS

MARKETS

Markets intended to drive investment, but are out-

• f-market policies and “events” in driver seat?

EVENTS POLICIES POLICIES POLICIES EVENTS POLICIES

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LEI expects the RCO proposal to have negligible impact on the PJM RTO capacity price, but Extended RCO proposal will raise capacity prices by as much as 20%

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Forecast for 2022/2023 Delivery Year - PJM RTO under Resource Carve Out (“RCO”) and the Extended RCO Parallel leftward shift of the supply curve from removing 7.7. GW of plants with actionable subsidies

Capacity (MW)

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$0 $5 $10 $15 $20 $25 $30 Nominal US$/kW-month ICAP ISO-NE NYISO (NYCA zone) PJM NYISO (NYC)

► This is consistent with technology improvements in electric generation equipment, which

the US Department of Energy has recorded to be as much as 28% on average for gas-fired generation from 2013 to 2015*

Most often, the Gross CONE has come down at the periodic demand curve re-sets

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Gross CONE in ISO-NE, NYISO and PJM

Circles indicate years where Gross CONE was changed as a consequence of the demand curve reset process

* Source: EIA. “Construction costs for most power plant types have fallen in recent years”. July 5, 2017. <https://www.eia.gov/todayinenergy/detail.php?id=31912> Sources for Gross CONE: ISO-NE: CONE and ORTP Updates; PJM: BRA Planning period parameters; NYISO: 2010, 2013 and 2016 Demand Curve Reports

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Technological innovation, changes in supply, and policy mandates are guiding developments in power markets

Decarbonization

State policies driving renewable generation mandates or carbon pricing mechanisms Examples include NY’s CES, Massachusetts procurement of offshore wind and large hydro

Innovation

Technical innovation driving down costs of renewable generation and storage resources - capital costs for wind resources declined by 25% and solar by 70% over the last 10 years Emergence of smart grids and new business models for utilities

Changes in supply

Low natural gas prices and policy-driven entry of renewable generation is forcing retirement of older coal and nuclear assets More capacity market rule changes on the horizon

Resilience

Resilience of the electric grid is challenged by evolving supply mix, so that utilities must examine ways of maintaining reliability of the transmission system Out of market mechanisms are being implemented to ensure resilience